If you are asking the question then you probably already believe in the answer.
Pitchbook is a company focused on analysis and research in VC, PE and M&A and per their data till the end of Q3 2021, valuations have soared in 2021. Comparing Q1 to Q3 the average has increased almost 75% and it is considerably higher than the median. This implies a few deals have raised at significantly higher numbers, pushing everything up. But even the average has grown by almost 50%, which is higher than the S&P i.e., a benchmark for the overall economy.
Another way to look at this is what law firm Fenwick published in its latest quarterly report around average share price increase aka a proxy for valuation. One conclusion from the graph below is that Q2 2020 was very likely the bottom, triggered by the pandemic. Another conclusion is not only did uprounds recover by Q4 2020, we have far exceeded pre-pandemic levels and those levels have since maintained.
So what does this mean for 2022? At Tau we have been advising our entrepreneurs as such and find they overwhelmingly agree:
1) When to raise?
When (a) the market is doing well and (b) your company is doing well. Still give yourself at least 3 months for starting a typical process to having money in the bank, and having another 3 months of buffer before running out of cash. Raising too much has less obvious downsides than raising too little but it can be insidious – your culture moves away from being lean and everyone gets a bit too comfortable.
2) How to raise?
Pre-emptive rounds become obviously more common in good times, especially from investors who have been tracking you for a while. If you are worried that preemptive leads to worse terms because you haven’t proven yourself out enough, then just negotiate and be willing to walk away. For instance, if you were going to raise in 6 months anyways then you as an entrepreneur have the upper hand in asking for the valuation you would grow into by then.
3) What not to do?
A rise in interest rates, a new covid variant, a geopolitical event on the other side of the world – the bull market can go away any day and nobody can tell you for sure when (especially those who say they can predict it). What remains true is all the usual advice around fundraising, from building long-term relationships with investors to controlling the timing of a fundraise. In particular we have been advising our portfolio to be mindful of insider-led rounds, they may be easier to do but you want to maximize the probability of success by expanding the circle of those vested in your success. Typically that is by having a new external lead, although a smaller existing investor leading works essentially well too. Above all, we advocate avoiding the hype, which is easier said than done. Raising money is not the goal, it’s the means to build a good company, so if you have no way of using the extra cash then simply don’t raise.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.